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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices structural vulnerabilities in prime and tax-exempt MMFs will lead to or exacerbate stresses in short-term funding markets. The following discussion sets forth potential policy measures that could address the risks prime and tax-exempt MMFs pose to short-term funding markets. This report is meant to facilitate discussion. The PWG is not endorsing any given measure at this time.
These potential policy measures differ in terms of the scope and breadth of regulatory changes they would require.
For example, many of the potential reforms would apply only to prime and tax-exempt MMFs, while reforms such as swing pricing could apply to mutual funds more generally. Moreover, some potential reforms would involve targeted amendments to SEC rules, which relevant MMFs could likely implement fairly quickly, while others would involve longer-term structural changes or may require coordinated action by multiple agencies. The different measures are not necessarily mutually exclusive, nor are they equally effective at mitigating the vulnerabilities of prime and tax-exempt MMFs. Policy makers could combine certain measures within a single set of reforms. Some policy measures listed below have been raised for consideration previously, including in the PWGs October 2010
report on MMF reform options and the FSOCs 2012 proposed recommendations on MMF reform, and warrant renewed consideration in light of recent MMF stresses.
This report focuses on reform measures for MMFs only. It is important to recognize MMFs role in the market events in March 2020 and to examine measures that would address concerns and structural vulnerabilities specific to MMFs. Although they are beyond the scope of this report, and as discussed generally above, there were other stresses in short-term funding markets in March 2020 that may have contributed to the pressure on MMFs.
As discussed in more detail below, the potential policy measures for prime and tax-exempt MMFs explored in this report are:
Removal of Tie between MMF
Liquidity and Fee and Gate Thresholds;
Reform of Conditions for Imposing Redemption Gates;
Minimum Balance at Risk MBR;
Money Market Fund Liquidity Management Changes;
Countercyclical Weekly Liquid Asset Requirements;
Floating NAVs for All Prime and Tax-Exempt Money Market Funds;
Swing Pricing Requirement;
Capital Buffer Requirements;

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Require Liquidity Exchange Bank LEB Membership; and New Requirements Governing Sponsor Support.
Overarching goals for MMF reform. As a threshold matter, it should be recognized that the various policy reforms, individually and in combination, should be evaluated in terms of their ability to effectively advance the overarching goals of reform.
That is:
First, would they effectively address the MMF structural vulnerabilities that contributed to stress in short-term funding markets?
Second, would they improve the resilience and functioning of short-term funding markets?
Third, would they reduce the likelihood that official sector interventions and taxpayer support will be needed to halt future MMF runs or address stresses in short-term funding markets more generally?
Assessment of the MMF reform options. An assessment of the effectiveness of reform options in achieving these goals should take into account: a How each option would address MMF structural vulnerabilities and contribute to the overarching goals;
b the effect of each option on shortterm funding markets and the MMF
sector more broadly, including through its effects on the resilience, functioning, and stability of short-term funding markets, as well as whether the reform option would trigger the growth of existing investment strategies and products, or the development of new strategies and products, that could either exacerbate or mitigate market vulnerabilities; and c potential drawbacks, limitations, or challenges specific to each reform option. The reform options considered in this report seek to achieve the goals in different ways. For example, some are intended to address the liquidity-related stresses that were evident in March 2020, while others also touch on potential creditrelated concerns. This menu of options reflects the possibility that future financial stress events may affect the liquidity of short-term investments, their credit quality, or both.
a How the reform options would seek to achieve the goals.
1 Internalize liquidity costs of investors redemptions, particularly in stress periods. Some options would impose a cost on redeeming investors that rises as liquidity stress increases to reflect the costs of redemptions for the fund. These options, particularly swing pricing and the MBR, could reduce or eliminate first-mover advantages for
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redeeming investors and protect investors who do not redeem.
2 Decouple regulatory thresholds from consequences such as gates, fees, or a sudden drop in NAV. Some options, such as those that revise fee and gate thresholds or introduce the floating NAV for retail prime and taxexempt MMFs, could eliminate or diminish the importance of thresholds such as 30 percent WLA or an NAV of $0.995 that may spur investor redemptions. By diminishing the importance of thresholds, these options could also give MMFs greater flexibility, for example, to tap their own liquid assets to meet redemptions.
3 Improve MMFs ability to use available liquidity in times of stress. In March 2020, some prime and taxexempt MMFs may have avoided using their liquid assets to meet redemptions.
Options such as countercyclical WLA
requirements or revisions to fee and gate thresholds could make MMFs more comfortable in deploying their liquid assets in times of stress.
4 Commit private resources ex ante to enable MMFs to withstand liquidity stress or a credit crisis. When prime and tax-exempt MMFs have encountered serious strains, official sector interventions have followed quickly.
Options such as capital buffers, explicit sponsor support, and the LEB could provide committed private resources to supply liquidity or absorb losses and thus reduce the likelihood that official sector support would be needed to calm markets.
5 Further improve liquidity and portfolio risk management. Changes to liquidity management requirements could include raising required liquidasset buffers. Other options could motivate more conservative risk management by explicitly making fund sponsors or others responsible for absorbing any heightened liquidity needs or losses in their MMFs.
6 Clarify that MMF investors, rather than taxpayers, bear market risks.
Government support has repeatedly provided emergency liquidity to prime and tax-exempt funds and also has obscured the risks of liquidity and credit shocks for MMFs. Some options, such as the floating NAV for retail prime and tax-exempt MMFs, swing pricing, and the MBR could make risks to investors more apparent.
b Effects on short-term funding markets. The reform options are intended to reduce the structural vulnerabilities of MMFs, which could make them a more stable source of short-term funding for financial institutions, businesses, and state and local governments. This would improve
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